Turkey: The Impact of ESG Compliance on M&A

Turkey: The Impact of ESG Compliance on M&A

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Concern around carbon footprints, climate change, greenhouse emissions and compliance with environmental regulations and anti-bribery and corruption legislation has been on the rise over the last 20 years. More recently, that concern has expanded to encompass an increased emphasis on sustainable development in business operations and supply chains. The drive for more accountability and transparency from financial institutions, private equity investors and governments around the globe has turned the spotlight on disparities in terms of pay, gender and diversity, as well as the use of slavery in manufacturing. What started as discrete areas of focus and/or regulation, now firmly fall under the mainstream umbrella term, “Environmental, Social and Governance” (“ESG”).

Legislative framework in Turkey

There is no one standard ESG legal framework. In any given jurisdiction, the standards against which ESG issues are measured will be a combination of hard law, regulatory requirements, voluntary undertakings and accepted industry practices driven as much by social pressures and reputational risk as by legislative necessity.

In Turkey, the legal framework concerning ESG is rather piecemeal, as in many other jurisdictions. Since Turkey became a party to the Financial Action Task Force of the OECD back in 1991, laws specifically addressing anti-bribery, money laundering and terrorism were enacted, such as the Law No. 5549 on the Prevention of Laundering Proceeds of Crime, and the Law No. 6415 on the Prevention of the Financing of Terrorism, in addition to those already existing within the scope of the Criminal Code.   

In terms of social issues such as discrimination and racism, the Turkish Constitution, the Criminal Code and the Law No. 6701 on Human Rights and address discrimination and racism in the generic sense, while the Labor Code governs equality and discrimination in workplaces. In 2012, to bring the health and safety standards closer to those under the EU Workplace Health and Safety Directive, Turkey enacted the Law on Occupational Health and Safety, which aims to regulate the duties, obligations and rights of employers and employees to ensure occupational health and safety in workplaces and to improve existing health and safety conditions. The law governs the health and safety requirements above those  the Labor Code, and expands the protections and rights of employees already in place thereunder.

In terms of environment, certain sectors such as energy, metal production, explosives and inflammable materials production, and mining and waste disposal are highly regulated in terms of the requirement to carry out a full environmental impact assessment before being able to proceed with a particular project.

Turkey has recently taken further steps to address ESG concerns with the introduction of mandatory compliance disclosure requirements for public companies. In October 2020, the Capital Markets Board of Turkey (the “CMB”) amended the Corporate Governance Communiqué to include sustainability principles as part of the disclosure requirements for publicly traded companies in their annual Corporate Governance Compliance Reports. The CMB also issued the “Sustainability Principles Compliance Framework” containing the sustainability principles to be followed by publicly traded companies. The framework is separated into three categories: environmental principles, social principals and corporate governance principles. While publicly traded companies are not legally required to operate in line with those principles, they will be required to disclose the reasons for and the effects of any non-compliance on environmental and social risk management in their annual Corporate Governance Compliance Reports. The amendment came into force on October 1, 2020, and the disclosure requirement must be incorporated into Corporate Governance Compliance Reports published in 2021.

The impact of such disclosure requirements remains to be seen but it is expected to have a positive impact on the level of transparency and accountability concerning ESG matters in the Turkish market. Certainly, many of the large Turkish conglomerates already report annually on their sustainability and governance regimes. Companies with teams dedicated to compliance and sustainability are becoming more commonplace.

Debt and equity investments led by IFIs require the implementation of corporate governance and environmental and social action plans or impose strict covenants regarding compliance. The prevalence of investments by IFIs in the Turkish market has and will continue to improve the overall ESG profile of investee companies and raise awareness of the significance placed on such issues in terms of driving change and adding value for stakeholders.

As more and more private equity firms and IFIs establish funds specifically designed to target sustainable investments, Turkish companies looking to attract such investors will need management and shareholders to take steps towards meeting the relevant ESG criteria. Organizations lacking teams dedicated to sustainability, governance and compliance are starting to take steps to put arrangements in place. This applies to larger corporates and smaller family-owned businesses, where planning for the next generation will necessitate the implementation of strategies to ensure the business adapts to legislative requirements and the more generic global change towards increased transparency and accountability surrounding ESG issues.

How could this play out for M&A transactions going forward?

The due diligence exercise is a critical aspect of any transaction, evaluating the potential legal risks, liabilities and obligations and forming the backdrop to the transaction documentation. In the traditional sense, it would cover compliance of the target and the business with various legal and regulatory requirements for an agreed period prior to the date of evaluation. Depending on the sector, additional diligence reports may be prepared by specialist technical or environmental experts. Given the shift to online virtual data room platforms over the last 15 years, which limit the need for any direct contact between the buyer’s team and the target, site visits and management discussions may also form part of the process.

The format of a traditional due diligence process, with a target providing documentation in response to a written request list, will serve to benchmark how the target is positioned in relation to certain legal and compliance issues falling under the ESG umbrella. However, there is an anticipated need for more management and board engagement as buyers and investors seek to understand the strategy and approach, to help assess the current position and formulate a plan for integration. A return to more Q&As as part of the diligence process is to be expected. By working closely with internal compliance and risk and HR teams, the buyer will be able to create a gap analysis that will identify the shortfalls that show that a target does not meet its investment profile. The scope of enquiry is also likely to extend beyond the target in order to gain a better understanding of contractors, supply chains and counterparties and assess the extent to which those relationships may fall foul of any ESG requirements.

Careful thought is needed to construct ESG warranties in such a way that a breach can easily be identified, considering the enforceability and recourse aspects. Since a warranty claim would only be successful to the extent that the buyer can demonstrate that the warranty has been breached and such a breach reduced the value of the company or business acquired, the ESG warranty must be drafted in such a way as to ensure that the losses flowing from it can be properly identified and documented. Warranties covering environmental matters, anti-bribery and corruption and generic compliance with laws will provide a certain level of ESG protection. Addressing issues around gender, diversity and sustainability require bespoke drafting, particularly given the lack of specific legislation to hang those provisions on. Such issues may be better addressed with a combination of warranty protection and incorporation into a post-acquisition integration and action plan. The warranties will address any historical exposure to potential liability and the action plan will focus on those risks and seek to correct those going forward.

The implementation of any action plan may form part of covenants and undertakings to be completed as part of the acquisition in the period between signing and closing or within a specified period, post-closing. The adoption of corporate governance action plans often required by IFIs are being broadened in scope to incorporate a much wider range of issues, driving best practices and raising the bar for ESG compliance. In addition to specific actions required to address issues identified at the time of the acquisition, businesses will be looking to put in place strategies to tackle future risks related to climate change, diversity, sustainability and forced labor that may not pose an immediate issue but which will have an impact on the ESG profile of the operation going forward and ultimately on valuation.


It is inevitable that ESG factors will increasingly influence how investors/buyers select business targets, given how internal requirements of investors and lenders increasingly require any target to meet certain ESG criteria in their current operations. Companies seeking to improve their overall ESG profile will continue to drive a range of investments  to improve their corporate image or grow customer engagement by diversifying into operations with a greater level of ESG compliance. Operating a business with a solid ESG policy, limiting exposure to legal and regulatory breaches through robust governance, will attract investors with specific ESG compliance requirements, enhance value during the lifetime of an investment and, as a result, mean that shareholders are best placed to command higher returns on exit or attract further investment in the future.

By Nadia Cansun, Partner, Dentons, and Merve Akkus, Senior Associate, BASEAK